What is COLA (Cost of Living Allowance)?
When companies seek to relocate mission-critical employees or new hires from low-cost areas to high-cost destinations, the negative standard of living impact can be a major barrier to acceptance.
A COLA (Cost of Living Allowance) benefit is additional compensation given to employees to help them offset and manage increased expenses (e.g., groceries, housing, utilities, and taxes) in a destination location compared to the departure location. By offering the benefit to employees considering relocating to higher cost locations, companies can make the move more attractive and feasible.
When to offer Cost of Living Allowance?
Whether designing a US domestic program or an International program, a common question asked before offering a COLA benefit is: “How drastic a difference does the cost of living have to be between the employee’s departure and destination locations to trigger the COLA benefit?”
Data experts use the most current information to estimate costs of common essentials, and the cost index of the original location is compared to that of the new one to come up with a percentage difference between the locations. While some employers are sensitive to even a 2% or 3% difference, as calculated by an expert third-party data firm, NEI’s 2024 COLA Survey noted that 44% of companies set eligibility thresholds at 5%. Furthermore, some companies choose to only pay the difference above a minimum threshold, but each company’s culture, business, and cost drivers influence the calculation and threshold approach.
How long should COLA payments continue and how might it be paid out?
- For international moves / assignments, COLA is often recalculated more frequently (typically semiannually) due to fluctuating exchange rates and other shifting global factors. When companies provide COLA for employees on temporary international assignments, if there is no official assignment end date, the employer might discontinue or phase-out the benefit if the employee is later localized.
- For U.S. domestic moves / assignments, COLA is usually calculated once and paid either as a lump sum or spread out over a set period (most commonly three years) with payments declining each year to wean employees off of COLA and encourage destination adjustment.
To avoid surprises, employees should be advised COLAs may be modified during the move or assignment. Though, as you might guess, there are usually no complaints when a COLA is adjusted upward.
COLA Trends | Findings from NEI’s 2024 Cost of Living Assistance Global Survey
Relocation packages vary widely across industries, making benchmarking vital so companies can stay competitive. Some companies and industries offer a more frequent, generous COLA, but others may not offer it at all.
NEI’s 2024 Cost of Living Assistance Global Survey, with over 200 participating companies, found the following International and U.S. Domestic trends:
- International: When cost of living assistance is necessary for international assignments and relocations, companies typically provide assistance in the form of a COLA or a Goods & Services Differential (G&S). Historically, assistance is provided to long-term assignees, as reflected in the survey results. We have seen a slight uptick in assistance provided to short-term assignees since the publication of our 2022 International All Benefits Survey.
- U.S. Domestic: When cost of living assistance is necessary for U.S. Domestic relocations, companies typically provide assistance in the form of a COLA or a Cost-of-Housing Assistance (where companies send funds directly to the lender for high housing costs specifically). Despite home price increases, mortgage rates double what they were compared to recent years, and an inflationary rise in prices for everyday goods and services, we have not seen an increase in COLA usage like we would have expected, as it appears companies are using a wait-and-see approach, expecting the market to swing back.
“Companies wonder if others are offering COLA more frequently with rising costs and interest rates. Based on our survey results, they aren’t, but the expectation is that usage could increase more in the coming years,” said Amy Smith, Director, Global Mobility Strategies at NEI.
Facilitating Talent Recruiting and Corporate Relocation Offers
Reviewing program intent, benchmarking against industry peers, and adhering to best practices can help you use COLA to build competitive recruiting and relocation offers. This, in turn, helps employees maintain their living standards, regardless of where their career takes them with you.
NEI’s Global Mobility Strategies Team would be pleased to help you determine whether a COLA benefit is right for your program and make the best decisions about how to administer it. We strive to help our clients embrace their business goals, while still offering the highest service and lowest cost exposure. If you would like to discuss COLA or any other mobility trends, please contact your NEI representative.
The above article is provided for informational purposes only. Please consult your tax, legal, immigration or accounting advisors before making any decisions or transactions.
What is COLA (Cost of Living Allowance)?
When companies seek to relocate mission-critical employees or new hires from low-cost areas to high-cost destinations, the negative standard of living impact can be a major barrier to acceptance.
A COLA (Cost of Living Allowance) benefit is additional compensation given to employees to help them offset and manage increased expenses (e.g., groceries, housing, utilities, and taxes) in a destination location compared to the departure location. By offering the benefit to employees considering relocating to higher cost locations, companies can make the move more attractive and feasible.
When to offer Cost of Living Allowance?
Whether designing a US domestic program or an International program, a common question asked before offering a COLA benefit is: “How drastic a difference does the cost of living have to be between the employee’s departure and destination locations to trigger the COLA benefit?”
Data experts use the most current information to estimate costs of common essentials, and the cost index of the original location is compared to that of the new one to come up with a percentage difference between the locations. While some employers are sensitive to even a 2% or 3% difference, as calculated by an expert third-party data firm, NEI’s 2024 COLA Survey noted that 44% of companies set eligibility thresholds at 5%. Furthermore, some companies choose to only pay the difference above a minimum threshold, but each company’s culture, business, and cost drivers influence the calculation and threshold approach.
How long should COLA payments continue and how might it be paid out?
- For international moves / assignments, COLA is often recalculated more frequently (typically semiannually) due to fluctuating exchange rates and other shifting global factors. When companies provide COLA for employees on temporary international assignments, if there is no official assignment end date, the employer might discontinue or phase-out the benefit if the employee is later localized.
- For U.S. domestic moves / assignments, COLA is usually calculated once and paid either as a lump sum or spread out over a set period (most commonly three years) with payments declining each year to wean employees off of COLA and encourage destination adjustment.
To avoid surprises, employees should be advised COLAs may be modified during the move or assignment. Though, as you might guess, there are usually no complaints when a COLA is adjusted upward.
COLA Trends | Findings from NEI’s 2024 Cost of Living Assistance Global Survey
Relocation packages vary widely across industries, making benchmarking vital so companies can stay competitive. Some companies and industries offer a more frequent, generous COLA, but others may not offer it at all.
NEI’s 2024 Cost of Living Assistance Global Survey, with over 200 participating companies, found the following International and U.S. Domestic trends:
- International: When cost of living assistance is necessary for international assignments and relocations, companies typically provide assistance in the form of a COLA or a Goods & Services Differential (G&S). Historically, assistance is provided to long-term assignees, as reflected in the survey results. We have seen a slight uptick in assistance provided to short-term assignees since the publication of our 2022 International All Benefits Survey.
- U.S. Domestic: When cost of living assistance is necessary for U.S. Domestic relocations, companies typically provide assistance in the form of a COLA or a Cost-of-Housing Assistance (where companies send funds directly to the lender for high housing costs specifically). Despite home price increases, mortgage rates double what they were compared to recent years, and an inflationary rise in prices for everyday goods and services, we have not seen an increase in COLA usage like we would have expected, as it appears companies are using a wait-and-see approach, expecting the market to swing back.
“Companies wonder if others are offering COLA more frequently with rising costs and interest rates. Based on our survey results, they aren’t, but the expectation is that usage could increase more in the coming years,” said Amy Smith, Director, Global Mobility Strategies at NEI.
Facilitating Talent Recruiting and Corporate Relocation Offers
Reviewing program intent, benchmarking against industry peers, and adhering to best practices can help you use COLA to build competitive recruiting and relocation offers. This, in turn, helps employees maintain their living standards, regardless of where their career takes them with you.
NEI’s Global Mobility Strategies Team would be pleased to help you determine whether a COLA benefit is right for your program and make the best decisions about how to administer it. We strive to help our clients embrace their business goals, while still offering the highest service and lowest cost exposure. If you would like to discuss COLA or any other mobility trends, please contact your NEI representative.
The above article is provided for informational purposes only. Please consult your tax, legal, immigration or accounting advisors before making any decisions or transactions.
